Electricity is more expensive, and bitcoin is worth less. What’s the worst that might happen? Miners were having a blast last year as bitcoin’s price soared to $68,000. According to some estimates, their earnings were hovering just near 90%, and many of them opted to expand their operations at a breakneck rate in anticipation of an even bigger windfall in 2022. That windfall has not materialized. Cryptocurrency markets have plummeted in recent months, with bitcoin’s price sitting at $30,630 at the time of writing.
At the same time, due to a rebound in demand and the war in Ukraine, power prices soared throughout the world. This is a challenge for bitcoin miners, who utilize high-energy mining computers known as ASICs to create Bitcoin by solving complicated mathematical puzzles.
Crypto miners
According to Bit fury CEO Valery Vavilov in a 2016 interview with Reuters, energy may account for up to 90% of a miner’s overhead. According to Daniel Jogg, CEO of Enerhash, a business that runs blockchain data centers, energy costs have risen so substantially in some regions of Europe that mining one bitcoin can cost up to $25,000 in some areas.
“Some operations were operating at a loss,” he says. Texas, a bitcoin mining hotspot, has been dealing with a severe heat wave that has led electricity prices to rise by 70% in the last year, from 10.6 cents to 18.4 cents per kilowatt hour.
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Following a mining ban in prior crypto superpower China in 2021, the United States now accounts for 37.84 percent of worldwide crypto-mining activity, according to the University of Cambridge. “The concern currently is not only the price of electricity on a gross basis, but also the price volatility,” explains Alex Brammer, vice president of business development at crypto-mining infrastructure startup Luxor Mining.
“It’s quite difficult to predict what energy prices will be in the future.” Since last summer, an increasing number of miners have joined the network, which has resulted in individual miners’ outputs being lowered.
In short, miners are spending more to produce fewer bitcoins, lowering the value of their currency. While miners are still making money, it is declining, according to Sam Doctor, chief strategy officer of digital asset investment bank BitOoda, who puts margins at 60 to 73 percent.
“Even miners who use newer mining rigs, which are profitable,” he continues, “are making less money than before.” Doctor adds that older ASICs from the S9 generation, which still account for a third of all mining rigs in operation throughout the world, are no longer economical in most circumstances.
crash as Bitcoin falters
“Now that energy prices are rising, miners without a fixed-price energy contract may be pressured on both sides.” Most miners, especially larger mining businesses, do not have such contracts, according to Doctor, since obtaining one demands “stronger credit” than most of them now have.
Miners are in a difficult situation, despite the nevertheless impressive margins. The market value of most publicly traded mining businesses has plummeted by more than 50%, including industry heavyweights Riot, Marathon, and Core Scientific. Riot and Core Scientific both fell short of their optimistic sales forecasts and have scaled down their expansion plans.
The danger is that if these unfavorable patterns continue, this might be the start of a larger industry-wide downturn. Miners were eager to acquire cartloads of ASICs to churn out more bitcoin in the two years leading up to the meltdown.
Marathon, one of the top three miners in the United States, acquired 78,000 ASICs from manufacturer Bitmain for a record $879 million in December 2021, following up with another purchase of 30,000 Bitmain ASICs for $120 million in August 2021.
Marathon had planned to run 133,000 rigs by the first half of 2022, but as of May, it only had 36,830 operating ASICs due to installation issues, bad weather at one of its Montana plants, and delays in getting an energy contract with Texas’ power system.
Because ASIC prices are often associated with bitcoin prices, the value of idle or yet-to-be-delivered ASICs might soon fall below the amount that Marathon—and other mining companies—paid for them around the top of bitcoin’s bull run.
Marathon’s representative, Charlie Schumacher, claims that the business paid “much below the current market pricing” for most of its newer mining rigs, with the exception of last-generation rigs like the 78,000 it bought in December. Marathon’s “asset-light approach,” in which the firm contracts with hosting providers rather than constructing its own infrastructure, he claims, protects the company from the industry’s problems.
“Many miners are having trouble paying for their machines because they initially spent extensively in infrastructure, hoping to eventually obtain the money to pay for machines to fill that infrastructure,” Schumacher explains. “We won’t have to pay for infrastructure before we pay our miners.” Miners’ ASIC purchasing binge, according to observers, was primarily funded by debt.
While Doctor will not name a specific corporation, he does claim that “some miners have unpaid expenditures.” They’ve placed an order for a large number of machines and paid a deposit, but they may not have the necessary funds in place, or they may be losing part of that funding to pay the second amount and get the rigs.”
According to Jurica Bulovic, head of mining at Foundry, a lender to mining firms, this burden, along with the decline in bitcoin’s price and higher energy costs, might have an impact on companies’ bottom lines.
“Anyone who acquired equipment at the peak of the cycle when bitcoin was 65,000 dollars and took out a loan to do so—which is a large portion of the industry—they are not cash-flow positive now,” Bulovic adds.
Following the crypto meltdown, there are hints that miners are in desperate need of cash, and that they won’t be able to rely on investors to aid them. Riot Blockchain, a large US miner, received $10 million via the sale of 250 bitcoins (out of a hoard of 6,320) earlier this month to support future development;
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Marathon revealed two days later that it was contemplating selling some of its bitcoins, but not “in the short term.” This went against a long-standing trend among miners to hang on to their cryptocurrency, or “HODL” (a typo subsequently read as “hold on for dear life”).
The selling spree isn’t limited to bitcoin: Luxor Mining is getting “frantic calls” from publicly traded corporations looking to sell ASICs for less than book value, according to Brammer. “Fire sales are starting to appear,” he says.
Even while vendors “don’t want to drop their pricing any more,” according to Robert Van Kirk, managing director of mining equipment marketplace Kaboom racks, despite lackluster demand, this might further sink ASIC costs.
The issue is whether this escalation will cause lenders to get concerned. Some mining businesses have borrowed money against their bitcoin holdings in the last two years of boom, or even negotiated so-called “equipment-backed debt” arrangements, where the loan was secured by the mining rigs themselves.
That collateral has lost value now that the price of bitcoin and ASICs is falling. “If the miners are over-leveraged, the suffering may spread across the sector.” For example, lenders, given the declining value of collateral,” explains Bulovic. “Even though no two lenders are same, and no two loans are alike.”
Consolidation in the bitcoin mining sector, as well as a wave of mergers and acquisitions, has become more common. “Over the following 12 to 18 months, information will emerge as to whether firms are run exceptionally well, are operationally efficient, and have healthy debt levels.”
